ct eu,

2d Session } JOINT COMMITTEE PRINT

EAST ASIA STUDY MISSION

JANUARY 5-14, 1980

REPORT

PREPARED FOR THE USE OF THE

JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES

JUNE 26, 1980

64-142 0

Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON: 1980

For sale by the Superintendent of Documents, U.S. Government Printing OfficeWashington, D.C. 20402

JOINT ECONOMIC COMMITTEE

(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)

LLOYD BENTSEN, Texas, ChairmanRICHARD BOLLING, Missouri, Vice Chairman

SENATEWILLIAM PROXMIRE, WisconsinABRAHAM RIBICOFF, ConnecticutEDWARD M, KENNEDY, MassachusettsGEORGE MCGOVERN, South DakotaPAUL S. SARBANES, MarylandJACOB K. JAVITS, New YorkWILLIAM V. ROTH, JR., DelawareJAMES A. McCLURE, IdahoROGER W. JEPSEN, Iowa

HOUSE OF REPRESENTATIVESHENRY S. REUSS, WisconsinWILLIAM S. MOORHEAD, PennsylvaniaLEE H. HAMILTON, IndianaGILLIS W. LONG, LouisianaPARREN J. MITCHELL, MarylandCLARENCE J. BROWN, OhioMARGARET M. HECKLER,MassachusettsJOHN H. ROUSSELOT, CaliforniaCHALMERS P. WYLIE, Ohio

JoHN M. ALBERTINE, Executive DfirecdorLouis C. KRAUTHOFF II, Assistant Direcior-Director, SSEC

RICHARD F. KAUFMAN, Aesisiane Director-GCeneral CounselCHARLES H. BRADFORD, Minority Counsel

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LETTERS OF TRANSMITTAL

JUNE 19, 1980.To the Members of the Joint Economic Committee:

I am pleased to transmit for the use of the Joint Economic Com-mittee, other Members of Congress, and the interested public, a reportentitled "East Asia Study Mission." This is a report of findings of aspecial team of Joint Economic Committee members, which includedmyself as Chairman, Representative Clarence J. Brown as StudyMission Vice Chairman, Senator William V. Roth, Jr., and Repre-sentative John H. Rousselot, who conducted 9 (lays of hearings infour East Asian countries-the Philippines, Hong Kong, Taiwan, andSouth Korea.

The Mission had an intensive schedule of hearings and appointmentsand individual briefings with U.S. business leaders and foreign govern-ment officials, numbering about 80 in all.

The Mission was undertaken at the suggestion of the U.S. Depart-ment of State and the Chamber of Commerce of the United States onbehalf of the Asia-Pacific Council of American Chambers of Commerce(APCAC). The purpose of the Mission was to determine how thiscountry can improve its competitive position in East Asia, the world'sfastest growing trade area.

The unique concept of a congressional committee traveling abroadto meet formally with the American business community and govern-ment leaders and hear firsthand about the problems they encounterin international trade has proven to be a very valuable project. Wetrust the findings will be useful to government and private officialsinterested in expanding U.S. exports.

The report is that of the participants in the Study Mission only, andis not a report of the full Joint Economic Committee.

Sincerely,LLOYD BENTSEN,

Chairman, Joint Economic Committee.

JUNE 19, 1980.Hon. LLOYD BENTSEN,Chairman, Joint Economic Committee,Congress of the United States,Washington, D.C.

DEAR MR. CHAIRMAN: Transmitted herewith is a report entitled"East Asia Study Mission." The Mission conducted 9 days ofhearings in Manila, Hong Kong, Taipei, and Seoul, January 5-14, 1980.

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The committee members heard testimony from, or met personallywith, 80 U.S. businessmen and foreign government officials.

This report summarizes the major findings of the Study Mission,and is expected to be an important contribution to the body of knowl-edge analyzing the problems faced by U.S. companies competingabroad and what steps the U.S. Government must undertake to solvethose problems.

Sincerely,JOHN M. ALBERTINE,

Executive Director, Joint Economic Committee.

CONTENTS

PageLetters of transmittal _… __- -_ III

I. Introduction -_-- 1II. Summary findings and recommendations -_-_- _- 5

III. Nature of the East Asia market - _-_- _- _- _ 9IV. Factors in the decline of the U.S. market share in East Asia -18

What happened - 20Initial response: U.S. efforts to reduce foreign market barriers-. 21

V. Disincentives and incentives to U.S. exporting - 23Income tax issues -_- - __-- ------------- 23Tax incentives ------------------------------- 28Foreign Corrupt Practices Act (FCPA) - _-_- __- ___ 29Webb-Pomerene Act -_----- ----- 37Financing - _----_----_---- _-- __ 38

VI. Economic and structural problems - _-_-_- __-_ 49Productivity -52__------ _-- _-- _- 49Attitudes ._- -_ ------------------------------ 52.Protectionism - _----------- - _-- 53Lack of infrastructure - ___-------- _--- __-__-_ 53

VII. Summary - 57

CHARTS

III-1. Distribution of U.S. exports in 1978 -_-_-_-__-_-__-__ 11III-2. East Asia as a U.S. export market, 1970-79 - _ 12III-3. U.S. and Japanese share of developed country exports to East Asia,

1960-78 -_---------------------- 13III-4. U.S. share in East Asian countries in 1978 - 14

V-1. Comparison of tax policies for overseas employees - _-__-__ 25

TABLES

III-1. World and East Asia import growth -__- _-_- _____ 15III-2. Growth of East Asian nonoil imports, 1975-78 - 16III-3. U.S. exports to East Asia, by commodity, by country, 1978 - 17

V-1. Average U.S. tax burdens of individual Americans in selectedcountries, under 1976 and 1978 Tax Acts - _-__- _ 27

V-2. Percentage of total exports receiving official support by insurance,guarantees and loans during 1978 - _- _- ____ 39

V-3. Official export financing resources - ___-_- __-__- __- __-_ 43

APPENDIXES

A. Tax incentives - _---- _------ ___------------------- 63B. Insurance aid to exporting -_---- __--_-__- __-_-_- _ 75

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I. INTRODUCTION

For a number of years, the Joint EconomicCommittee has been deeply concerned about thepoor performance of the United States ininternational markets. This poor performancereflects some very serious underlyingeconomic problems, such as slow U.S.productivity growth and a generally lowpriority assigned to export markets by bothU.S. industry and government. But it alsoreflects insensitive government regulatory,tax and financing policies which shackle U.S.firms operating abroad, while foreigncompetitors enjoy a rich panoply of benefitsand incentives designed to help them increaseoverseas sales.

U.S. exports account for 8 percent of GNP,but unlike many other foreign countries,especially Japan and West Germany, the UnitedStates does not seem to fully recognize theimportance of trade for employment, income,investment, and economic growth at home.

The persistent and continuing trade andpayments deficits of the United States fuelinflation and represent lost economicopportunity. Moreover, they contribute to aloss of credibility of the United States as aworld leader.

Despite the seriousness of these problems,the U.S. has no economic strategy torealistically cope with them. Unlike Japan,the United States has no integrated policy toguide domestic and international economicperformance. The basic causes of our

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economic weakness are left unaddressed in themistaken notion that, with time, our problemswill take care of themselves.

The Joint Economic Committee believes thatthere needs to be a thorough examination ofthe international competitive position ofAmerican industry. Major initiatives areessential to improve policy and performance.

Against this backdrop, a Study Missionfrom the Joint Economic Committee went toEast Asia in January 1980 to hold ten days ofhearings and meetings to unearth the problemsand to determine how the United States canimprove its competitive position,particularly in developing nations.

The Study Mission was suggested to theJoint Economic Committee in October 1979 bythe U.S. Department of State and the Chamberof Commerce of the United States on behalf ofthe Asia Pacific Council of American Chambersof Commerce (APCAC). Because of its broad-based perspective on the U.S. economy and itsfreedom from legislative responsibilities,the State Department and the U.S. Chamberfelt that the Joint Economic Committee wouldbe the logical body to undertake this StudyMission.

East Asia was chosen because it is one ofthe world's most economically dynamic regionsand the world's fastest growing trade area.Over the past decade, some countries in theregion have been expanding their real GNPs bymore than 10 percent annually, and real GNPgrowth for the region as a whole (excludingChina) is 7 percent annually. Imports (incurrent terms) have increased an average of20 percent annually.

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In its study, the Joint Economic Committeefound some good news and some bad news. Thegood news was that U.S. two-way trade withEast Asia is now equal to that of all ofEurope. The bad news was that despite thegrowing importance of East Asia, the U.S.share of that regional market has droppedfrom 41 percent in 1960 to 34 percent in1979.

The Study Mission found that the mainconcerns of U.S. businessmen in East Asia arenot the economic problems (though they arewell aware of these), but tax, legal,regulatory and financing problems, as well assome problems of attitude. There iswidespread feeling among the Asian andAmerican businessmen in that region that theUnited States has neglected its economicinterests in the region. Amercian exporterscomplain of indifference in Washington and ahost of regulations and policies which impedetheir ability to compete with the fierceinternational competition in East Asianmarkets. The U.S. Government acts as a nay-sayer to its own exporters by shackling themwith a host of tax burdens, disincentives andrestrictions, while the home governments ofour world trade competitors act as coaches totheir exporting firms.

It is obvious that the problems faced bythe U.S. trade community in this importantpart of the world can provide valuableinsights into the extensive issues ofeconomic stagnation at home and erosion ofour international economic performance ingeneral.

In deciding to undertake this StudyMission, the Committee was cognizant of thefindings of an exhaustive study of exportcompetitiveness problems done jointly by the

64-142 0 - 80 - 2

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U.S. embassies and the U.S. Chambers ofCommerce in 14 East Asian countries, based onextensive interview and questionnaireresponses from roughly 300 local and U.S.importing firms. This Joint CompetitivenessStudy provided both a useful catalogue anddescription of major problems and indicatedtheir relative importance.

To pursue its mission, the Committeevisited four countries in East and SoutheastAsia: the Philippines, Hong Kong, Taiwan,and Korea. Because of its concern with U.S.export competitiveness in all East Asia, theCommittee invited U.S. and foreign businessand government representatives from all thecountries of the region to testify at thehearings. Thus, the Study Mission was ableto examine export problems facing the U.S. inthe most advanced industrial nations, such asJapan, as well as in newly industrializingcountries, such as Korea, Taiwan, andSingapore, and in developing nations, such asthe Philippines, Indonesia, Malaysia, andThailand.

The Committee heard oral presentationsfrom 80 participants, supplemented by writtenstatements. The Committee Members alsoreceived valuable information throughindividual meetings with U.S. and localbusinessmen and government officials.

II. SUMMARY FINDINGS AND RECOMMENDATIONS

In this report the Study Missionconcentrates on the noneconomic problemsfacing U.S. businessmen doing businessabroad. The major economic problems ofinflation, dollar deterioration, anddiminishing productivity are not ignored.They simply are not the major concern of thisreport; they are thoroughly covered in otherJEC reports. The following is a briefchecklist of the major findings andrecommendations of the JEC's East Asia StudyMission:

The heavy burden of taxation onAmericans living overseas has anadverse effect on U.S. exportperformance. Contrary to congressionalintent, amendments to Section 913 ofthe Internal Revenue Code enacted inthe Foreign Earned Income Act of 1978have in many countries increased, notdecreased, the tax burden on U.S.businessmen operating overseas,compared to the old Section 911 of theIRS Code, as amended by the Tax ReformAct of 1976.

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Recommendation No.1

The Study Mission calls upon thecongressional tax-writinq committeesto convene hearings on the tradeimpact of our tax laws and enactcorrective legislation on Sections911 and 913 of the Internal RevenueCode to put Americans working abroadon a competitive footing withthirdcountry nationals.

Tax incentives for market promotion,offered liberally by U.S. competitors,are only offered in token form by theUnited States.

Recommendation No. 2

Tax credits for initial costs ofdeveloping new foreign markets couldhelp put U.S. business in a morefavorable competitive positionrelative to our major tradingpartners.

The Foreign Corrupt Practices Act is anact with laudable goals but is- badlydrafted, ill administered, and resultsin lost markets for U.S. business.

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Recommendation No. 3

The Congress should streamline theadministration of the FCPA and makeit predictable and consistent. Inaddition, we should seek extensionof the worthy goals of the FCPA on areasonable worldwide basis by urgingadoption of an international code ofbusiness conduct.

The Webb-Pomerene Act is so ambiguousand confusing that it no longerencourages the formation of U.S.consortia capable of competing forinternational contracts in situationswhere U.S. firms are otherwiseexceptionally well qualified tocompete.

Recommendation No. 4

While preserving the integrity ofdomestic antitrust legislation,Congress should revise the Webb-Pomerene exemption to make it trulyeffective in stimulating exporttrade associations.

Export-Import Bank financing of U.S.exports is inferior in rates, amountsfinanced, insurance coverage, and inmixed and concessional creditarrangements compared to terms offeredby competitor nations. U.S. exportssuffer therefore.

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Recommendation No. 5

The Congress should review theentire spectrum of Export-ImportBank financing arrangements to helpmake U.S. financing efforts morecompetitive with those of ourtrading partners. Morespecifically, the funding offeasibility and project designstudies should be raised from thepresent $3.8 million to $5 to $10million. The leverage of suchfunding in winning multimilliondollar projects is clear cut.

In addition, the Exim Bank shouldestablish a special small businessexport funding program operatingthrough commercial banks with Exim(or FCIA) guarantees of up to 80percent of loan advances.

III. NATURE OF THE EAST ASIA MARKET

The designation "East Asia" is meant toinclude mainland Asia from Burma eastward toChina, Hong Kong, and Taiwan, and thecountries of Korea, Indonesia, thePhilippines, New Zealand, Australia, Japan,and the small island nations of the Pacific.

East Asia accounted for 15 percent ($187billion) of world imports in 1978. It bought10 percent ($62 billion) of the manufacturedexports of developed countries -- the UnitedStates, Japan, Canada, and Western Europe.For the United States, East Asia is even moreimportant. The U.S. shipped 20 percent ofits total exports, worth $29 billion, to EastAsia in 1978. As Chart III-1 shows (see endof chapter), next to Western Europe, EastAsia is the largest export market for theU.S., but the U.S. share of that market isdeclining as competitor nations do betterthere.

In 10 years, from 1969 to 1978, the EastAsia import market quintupled, exceeding theworld import growth rate. But U.S. exportperformance failed to keep pace as reflectedin Chart III-2.

During the 10-year period, imports intothe developing countries of East Asia grewmuch faster than did imports into developedEast Asian countries -- Australia, Japan, andNew Zealand. But, in the developingcountries, too, imports from the U.S.increased at a slower pace than did importsin general (see Table III-1).

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Over the period 1975 to 1978, total EastAsian nonoil imports grew an aggregate ofapproximately 65 percent. East Asian importmarkets grew fastest in Thailand, Korea,Malaysia, and Hong Kong and slowest in NewZealand and the Philippines, as shown inTable III-2.

As Chart III-3 shows, from 1960 to 1978,the U.S. share of developed country exportsto East Asia slipped from 41 percent in 1960to 34 percent in 1978. Japan's share grewsteadily from 13 percent in 1960 to nearlyone-third of the market to 1978.

In manufactured goods, which account forhalf of U.S. exports to East Asia, the U.S.market share was 24 percent in 1978. ChartIII-4 portrays the U.S. market share bycountry. Aside from Japan, the U.S. has thelargest share of the market for manufacturedgoods in Singapore, Australia, and thePhilippines at 25 to 60 percent. Notsurprisingly, the U.S. market share issmallest in China in view of late arrival inthat market, although the recent agreementgiving China Most Favored Nation (MFN)treatment should boost U.S. exports to China.

While 20 percent of total U.S. exportswent to East Asia in 1978, the percentage forsome product groups was higher. Forty-fivepercent of U.S. exports of raw materials, 30percent of U.S. food exports and 25 percentof U.S. fuel exports go to East Asia (seeTable III-3).

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CHART III-1.

DISTRIBUTION OF U.S. EXPORTS IN 1978

Source: U.S. Department of Commerce.

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CHART III-2.

EAST ASIA AS A U.S. EXPORT MARKET, 1970-1979

(In billions ofU.S. dollars)

200

175

150

125

100

75

50

25

0'7

Total world exports/ to East Asia

/~~~~~~

,-' - -U.S exports~~~~~~~~~~~~ ~~to East Asia

;0 Ail ';2 ';3 '74 ';5 ';6 ';7 ';8 79 '80

YEAR

Source: U.S. Department of Commerce.

CHART III-3.

U.S. AND JAPANESE SHARE OF DEVELOPED COUNTRY EXPORTSTO EAST ASIA, 1960 TO 1978

45-

40~

35 \__-

30- -- --

| 20 ,< | ~~~~~~ ~~Legendl

15 -. . .- Japan

10-

5-1960 1962 1964 1966 1968 1970 1972 1974 1976 1978

YEAR

Source: U.S. Department of Commerce

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CHART III-4.

U.S. SHARE IN EAST ASIAN COUNTRIES IN 1978

Source: U.N. Trade Data.

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TABLE III-1.

WORLD AND EAST ASIA IMPORT GROWTH

(In percent)

Per annum growth

1969-78 1969-72 1972-75 1975-78

Growth of world imports 19 15 28 15

Growth of East Asiaimports 21 15 33 15

Growth of East Asiaimports from the U.S. 17 12 29 12

Growth of developingEast Asia countrylimports 23 26 34 19

Growth of developingEast Asia countryimports from the U.S. 21 15 35 15

1That is, excluding Japan, Australia, and New Zealand.

Source: International Monetary Fund.

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TABLE III-2.

GROWTH OF EAST ASIAN NONOIL IMPORTS19 75-78

Country Percent Country Percent

Thailand 140 Australia 70Korea 111 Singapore 62Malaysia 106 China 46Hong Kong 102 Japan 44Indonesia 82 Philippines 31Taiwan 77 New Zealand 14

Source: International Monetary Fund.

TABLE III-3.

U.S. EXPORTS TO EAST ASIA, BY COMMODITY, BY COUNTRY, 1978

(In millions of U.S. dollars)

Total Food- Raw Chem- Semi- Mach- Trans- ConsmrPartner trade stuffs matrls Fuels icals finshd inery port goods Other

World 143,660 28,709 10,765 3,980 12,483 13,557 43,207 18,845 7,640 4,476

E. Asia 28,758 7,161 4,833 985 2,558 1,703 6,987 2,011 1,304 1,213

Japan 12,885 4,391 2,717 824 1,088 608 1,858 669 578 150S. Korea 3,160 652 920 50 165 121 724 231 37 260Australia 2,910 110 122 30 337 315 1,192 361 251 192Taiwan 2,339 663 309 30 216 157 567 206 108 83Hong Kong 1,625 260 209 5 154 129 404 79 133 252Singapore 1,462 88 32 6 112 79 805 233 71 36Philippines 1,040 184 81 8 119 125 388 44 58 32China 824 416 214 2 59 21 94 12 3 3Indonesia 751 244 90 10 77 34 178 71 11 36Malaysia 728 53 26 3 66 26 466 18 12 58Thailand 629 69 95 6 103 42 178 25 19 92New Zealand 405 31 18 11 62 46 133 62 23 19

Percent ofU.S. Exportsto E. Asia 20.0 25.0 44.9 24.7 20.5 12.6 16.2 10.7 17.1 27.1

Source: U.S. Department of Commerce.

IV. FACTORS IN THE DECLINE OF THEU.S. MARKET SHARE IN EAST ASIA

The JEC Study Mission concludesunanimously that past U.S. attitudes andpolicies toward exports have been much toocomplacent in assuming that the U.S. enjoysadvantages that will automatically maintainits competitive position in internationalmarkets. The fact is that American exportmarketing efforts labor under seriouseconomic, structural, and regulatorydisadvantages that work against U.S. salespotential. Some have wrongly assumed thatflexible exchange rates would alleviate U.S.international economic problems when taxpolicies and regulations have furtherweakened U.S. competitiveness. The situationcan be corrected, but it will require a majoreffort by U.S. Government, business, andlabor leaders.

All in all, a distressing picture ofunrealized opportunity and weakened U.S.image in East Asia is apparent. Itdramatizes the lack of vigorous U.S. exportpolicy. One cannot avoid comparison withJapan in that respect. The U.S. shows lessability to price compete. Advantages ofdollar devaluation to gain increased sharesof the market were lost. Nor has therelative U.S. cost position been improved bydomestic protectionist legislation. Bycontrast, Japan conducts a highly developedexport strategy involving continuing programsfor productivity improvement, provision offinancial resources and maintenance ofsupportive services in customer countries.

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Exports are accorded high priority as apolicy objective.

Meanwhile, the U.S. continues to driftwithout any clear policy directives for ourworld trade. Deeply absorbed with its largedomestic economy, the U.S. neglects foreigntrade interests. There is no question thatthis neglect has been instrumental inbringing about the decline of the U.S. sharein the East Asia market. With this loss, andsimilar declining export competitiveness inother sectors of the world, comes a wholetrain of undesirable domestic U.S. problems-- reduced growth, lost income, inflationarypressures, unemployment, international dollarerosion, and, inevitably, declining prestigeamong world powers. Underlying these factorshas been poor economic performance at home,including slowdown in productivity growth andvery high rates of inflation.

It is imperative that the U.S. restore itseconomic productivity and reverse thedeterioration of American economic,political, and security positions in theworld. As part of this effort, Americanbusiness enterprises, the U.S. Congress andthe Administration must give far higherpriority to developing strong export markets.Failure to do so will be at national peril.

A substantial part of the U.S. tradeproblem stems from failure to recognizechanges that have been taking place in theinternational economy. It is relevant toreview these changes and their implicationsfor the United States.

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What Happened

As the only major industrial nation in theworld not devastated by war, in the periodfollowing World War II the U.S. enjoyedunchallenged predominance in theinternational economy. America had survivedthe war with an intact and relatively modernindustrial plant and large, pent-up consumerdemand both in the domestic and foreignmarkets. This combination made possiblequick and economically profitable conversionto peacetime production. Former world tradecompetitors had lost substantial portions oftheir industrial capacity in wartimedestruction, leaving the U.S. alone as asupplier in the face of great internationalneed for raw materials, capital equipment,and consumer goods. The U.S. businesscommunity, meanwhile, had inherited a largestore of accumulated wartime technology --much of it appropriate to peacetimeapplications.

These advantages gave us a tremendoussuperiority in export competitiveness,technology and acceptance in internationalmarkets. It also gave rise to a sense thatwe could not be challenged.

But the world has changed greatly in 30years, during which the U.S. has tended torest on its laurels as an industrialcompetitor. Postwar reconstruction throughMarshall Plan aid, open licensing and U.S.technology transfer for reasons of mutualsecurity, Bretton Woods and the GeneralAgreements on Tariffs and Trade resulted inhigher costs in the U.S. and newer, moretechnologically advanced plants and equipmentin Europe and Asia that put formerlydevastated nations in a position to compete

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for world markets more advantageously thanthe United States.

The European Common Market and some of thedeveloping economies began to rival the U.S.in market growth by using high savings ratesfor modernization of plant and thestimulation of productivity. In the early1960s, U.S. competitive superiority began tobe overtaken. The U.S. trade surplusesstarted to decline and, in 1971, we slippedinto deficit. In only two years since thenhas our trade account been in surplus.

The fact that the U.S. bears a major shareof the costs of international securityundertakings of the free world should not beoverlooked. It is a cost carried in theprice of every American product competingabroad.

Initial Response: U.S. Efforts toReduce Foreign Market Barriers

Initial U.S. responses appropriatelyfocused on efforts to attract developed and,more recently, developing nation tradingpartners by urging reduction of import andforeign exchange restrictions in order togive U.S. exporters market opportunities inother countries that would be more equivalentto the opportunities they enjoyed in the U.S.market. The major initial focus was tariffbarriers. More recently, nontariff measureshave been the focus of our tradenegotiations.

Since the early 1970s, U.S. efforts toimprove equity of export market opportunityhave concentrated on negotiating furtherliberalization by major trading partners withsurpluses. Thus, the Committee last year

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commissioned a study and held hearings on theproblems of access to the Japanese market.

While the Multilateral Trade Agreements of1979 have potentially brought the U.S. closerto an equitable trading system, there isstill much room for improvement. But basicstructural shortcomings in the U.S. tradesituation will not be cured by addressingtrade barriers alone.

As more of these trade barriers areeliminated, other problems, especially basicstructural problems, become more apparent.Before the U.S. can expect to improve itsbalance of payments, it must address problemsof internal U.S. economic policy andbusiness attitudes which contribute todeclining export market shares. It hasbecome clear that the U.S. economy suffersfrom major structural and programdisadvantages as an exporting nation.

Foremost on the minds of Americanbusinessmen abroad, however, were the tax,regulatory and financing disincentives.These are the problems that comprised most ofthe Far East discussion and comprise most ofthe discussion for the remainder of thisreport.

These problems apply across the board toall U.S. export groups -- food stuffs, rawmaterials, fuels, chemcials, manufacturedgoods and consumer goods. U.S. cattlemenseeking to expand beef exports to Japan andU.S. chemical companies seeking to sell theirproducts to rapidly industrializing Taiwanare in the same boat, hampered by flaws inU.S. law and policy.

V. DISINCENTIVES AND INCENTIVESTO U.S. EXPORTING

Let us now turn to the crux of thespecific problems faced by U.S. businessmenoperating abroad.

Income Tax Issues

The United States is the only majorcountry which taxes the foreign-earned incomeof citizens living abroad. Chart V-1illustrates this unhappy situation.

Taxation of Americans living overseas wasuniformly cited by American businessrepresentatives in East Asia as one of themost critical problems facing U.S. exportersin that region. Significantly, the attentiongiven this issue at every stage of theMission's visit was not based on personalhardship because most companies compensatetheir American employees for the added taxburden. Instead, American businessmenemphasized that because many companies docompensate their employees, their cost ofemploying an American national, compared toother third country nationals, issignificantly higher. American tax laws,therefore, encourage these companies overseasto reduce the proportion of their expatriatestaff who are Americans. The example of afirm operating in Singapore was cited. Ofapproximately 100 expatriates, 19 percentwere third country nationals in 1975; by 1979this proportion had increased to 41 percent.Where companies do not compensate, the effect

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is just the same. Because of the tax burden,Americans can simply not work or serve asbusiness representatives at the same level ofcompensation as Britons, Australians, orother third country nationals.

The reduction of Americans workingoverseas has an adverse effect on U.S.exports because Americans involved inpurchasing, equipping, or design decisionsare familiar with U.S. goods and technologyand tend to specify and order Americanequipment and services. Europeans and otherthird country nationals are naturally morefamiliar with and tend to buy the products oftheir own countries.

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CHART V-1.

COMPARISON OF TAX POLICIES FOR OVERSEAS EMPLOYEES

aT. . IXaA.tu(11mar. T.i * OAxnod

T.n n,. Cut d roar tEa- Gt it. o I-aa texna LIoNK on tw he Sts-ask

Country sfTV - E..) Alma, Ca=y (aT .too eansUnited Yes' Yes Yes Yes' Yes '20.000 exclusion under Secion 9t11 NoStates for those in qualified camps.

'Cestain deduchons pernnied unde,complex Section 913 tests.

Japan No No No No No' 'Rental interest, etc. on on-shore Yesinvestments totally exempt tomn taxationduntig non-residence status only.

Italy No' No No No Complex 'Complex non-residency requirenents Goernmmentormtas 'Limitaton placed on daily expenses for, edto dsorage home leave and R&R. companesmoeign

ivestments

France No 2 No No No Complex 'Assumes accompanied tour/rules for dual Governmenttom-ulas restdency-unatxcompanied-nery complex. oned

'Recent gove-ment policy aimed to companiesencourage more French engineers to acceptoverseas mnir

South No No No No No 'Most liberal pohcies with respect to YesKorea _ individuals - Koea commined to exports ofKorea ~~~~~~~~~~~~~domestic uneniploymet.l

Germany Noi No' No No Some 'Complex non-residency requirements aimed Felimilaions. at tours of less than 6 months.Generally 'Coomples definitions.

libe~al. 'Some limitations designed to reduceexcesses.

Canado No' No No No No 'Acoompanied tour only. It anioy of head of Nohousehold remains in Canada all morldndeearnings suject to full taxation.

Sweden No No No No No 'Recently liberalized tax polices in order to Fe.encourage acceptance 01 overseasassignments.

United No No' No' No Complex 'U.K. recently liberalrzed tax polces in FemKingdom equiements Oder to encourage.

'Some linitahions.

Source: "Report of the Task Force to Study the Tax Treatment of AmericansWorking Oversenas," The President's Export Council, Subcommittee on ExportExpansion (December 5, 1979).

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The heavy burden of American taxation, itwas suggested, most adversely falls onindependent businessmen, professionals, andemployees of charitable organizations andinternational organizations, many of whomhave been forced to repatriate. As onewitness stated: "You are looking at a dyingbreed. When your Committee comes back toAsia, you probably will not find us here."

Prior to 1977, Americans abroad wereexempted from the first $20,000 to $25,000 oftheir income, a benefit constantly eroded byinflation and substantially reduced bySection 911 of the Internal Revenue Code, asamended by the Tax Reform Act of 1976. In1978, to alleviate the burden on privateAmericans working abroad and achieve greaterparity between them and Americans overseas inthe government service, the Congress passedthe Foreign Earned Income Act (FEIC)permitting, under Section 913 of the InternalRevenue Code, deductions for certain costs ofliving overseas. But the modifications madeby the 1978 Act have, in many instances, madematters worse, not better.

One witness presented the conclusions of astudy of the personal income tax returns ofindividuals located throughout East Asia.These returns were calculated both on thebasis of the original 911 provisions (whichSection 913 is supposed to correct) and onthe new Section 913 basis, enacted in 1978.According to this testimony, following thestrict guidelines and interpretations ofSection 913 by the IRS, the average taxburden for most East Asian countries (exceptJapan) is significantly heavier under thesupposedly more liberal Section 913, comparedto the old Section 911, by an average of 15to 20 percent. The relevant data are shownin Table V-1.

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TABLE V-1.

AVERAGE U.S. TAX BURDENS OF INDIVIDUAL AMERICANSIN SELECTED COUNTRIES, UNDER 1976 AND 1978 TAX ACTS

Tax "as if" Tax (before foreign Actual 1978 taxemployed in tax credit) on pre- (before foreign

Country the U.S. 1976 rules tax credit)

Hong Kong $15,617 $22,683 $26,850

Indonesia 8,533 21,296 24,318

Japan 10,350 40,526 29,280

Malaysia 6,187 17,526 21,718

Philippines 5,652 13,116 16,423

Singapore 6,620 12,270 14,881

Taiwan 8,687 10,215 13,934

Source: Testimony presented in Manila, The Philippines, by GeorgeH. Liesenberg, Chairman, Tax Committee, Asia-Pacific Council of Amer-ican Chambers of Commerce (January 6, 1980).

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The Mission is seriously concerned aboutthe impact of U.S. taxation on U.S. exportperformance. We believe the adverse tradeimpact of Sections 911 and 913 of the IRSCode has not been fully appreciated.Moreover, we note with concern allegationsthat IRS regulations relating to Section 913have had a restrictive effect, contrary tothe congressional intent. Therefore, theStudy Mission calls upon the congressionaltax committees to convene hearings onSections 911 and 913, their impact on trade,their implementation by the IRS, and proposedlegislative remedies. The evidence indicatesthat neither the interests of tax equity norinternational trade are being served by thepresent law. We believe the seriousdeficiencies in the American system of taxingoverseas nationals must be promptlycorrected.

Tax Incentives

The Study Mission also receivedrecommendations of the Asian-Pacific Councilof the American Chambers of Commerce.(APCAC) that the provisions of the DomesticInternational Sales Corporation (DISC) shouldbe retained in law and strengthened. APCACopposes restricting or eliminating DISC.APCAC argued that DISC, in its present form,can be a powerful force in advancing U.S.trade interests in China, and urged someliberalization to increase its potentialeffectiveness in that trade area.

Members of the Mission were impressed bythe fact that presentations on tax problemsstressed the elimination of disincentives andcomparative disadvantages, rather than costlytax incentive schemes to stimulate exports.Nevertheless, we cannot ignore the incentives

29

provided by many of our major internationalcompetitors. State-owned corporations areinvolved increasingly in trade, competing forbusiness on a subsidized basis.

In Appendix A is a comparative study ofexport incentives in the United States,France, Germany, Japan, and the UnitedKingdom. This study was prepared by theInternational Division of the Chamber ofCommerce of the United States.

Competitors frequently have the benefit ofassistance of their governments in marketpromotion. To offset these benefits, it hasbeen suggested that tax credits be providedto businesses for initial developmentalexpenditures in developing new markets. Thenewly organized and strengthened Office ofU.S. Special Representative for Trade andother appropriate agencies should considerthe importance of such a measure as one facetof a revised stance for U.S. export policy.Tax credits for initial costs of developingnew markets could help to put U.S. businessin a more competitive position and encouragea more vigorous pursuit of overseas markets.Clearly, however, such tax incentives must bedrawn carefully to avoid conflict with theMultilateral Trade Negotiations (MTN)Subsidies Code.

Foreign Corrupt Practices Act (FCPA)

Another disincentive to U.S. exports isthe Foreign Corrupt Practices Act (FCPA),which the overseas business community arguesis helping foreign competition withoutachieving a reduction in the prevalence ofcorruption practices. In fact, it rewardscorrupt practices by competitors.

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The FCPA was enacted in 1978 as a means ofestablishing new standards of conduct ininternational trade. It was designed toensure that American exporters would nolonger take part in shoddy, shady practiceslike bribery, that have unfortunately becomeingrained and accepted in many parts of theworld. The problem, however, is that thehigh standards we demand from Americanbusiness are not matched by any other majortrading nation. Side payment for servicesprovided as part of government duty remainsthe rule in many world markets, including theFar East. Although it has precluded Americanfirms from taking part in questionable orillegal transactions, the FCPA has notreduced corruption in world trade, but it haseffectively precluded U.S. traders fromfollowing some local procedures that, though,unconventional by American standards, areperfectly legal and required normal practicein most countries. The price of thismorality is a competitive disadvantage intrade and frequently lost business.

The answer to this problem is not to seekthe lowest common denominator in world tradeby turning our backs on the FCPA. Rather, weshould be encouraging our trading partners tojoin us in the effort to eliminate, or atleast greatly reduce, the incidence ofcorruption in the world of trade. Therefore,the Members of the JEC Study Mission, joinedby several other Colleagues in the Senate andHouse, have introduced a Joint Resolution topromote this and guarantee that Congress willbe informed about the extent to which othernations are prepared to work with us in thiseffort.

Specifically, the Resolution calls uponthe President to press for development andadoption of an International Code of Business

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Conduct at the upcoming Venice EconomicSummit. It further urges the President topursue bilateral and multilateralnegotiations on standards of businessbehavior. The President is requested toreport the results of such negotiations toCongress by January 1981, and the JointEconomic Committee is given 60 days in whichto suggest additional actions to help realizethe objective of an International Code.

We urge the Administration to initiate, assoon as possible, these efforts to reach aninternational agreement to determine whichpractices are acceptable under localstandards and which are not.

Moreover, the Administration should giveimmediate attention to cleaning up theregulatory provisions and simplifying to themaximum the recordkeeping and reportingrequirements. Unnecessarily onerousprovisions affecting foreign nationals orrequiring performance not clearly required inthe Act should be dropped. At present, themass of regulation and recordkeeping thatexporters have to contend with represents aserious and unnecessary burden: vagueness,uncertain interpretation, unnecessary zealousenforcement, and excessive recordkeeping. Itwas brought to our attention that many Asianbusinessmen and government officials haveterminated business relations with U.S. firmsbecause of the present U.S. law and itsrequirements.

An example of heavy recordkeepingrequirements is the provision of the Actpermitting certain "business facilitationpayments." These are minor "tips" fordocument processing and other minorauthorizing actions, exempted because in manycountries it - is local practice to pay

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officials at minimum levels and expect that

they supplement wages from fees, gratuitiesor other payments for services rendered.However, to assure that payments claimingexemption from FCPA do in fact meet

eligibility criteria, the recordkeeping,reporting and certifying requirements are so

demanding, far-reaching and burdensome as to

constitute a major impediment to U.S.

business relationships in East Asia. This

occurs because many payments abroad are made

by local and foreign firms alike through

agents, who are given commissions to conductdefined activities such as customs clearanceof imported and exported goods. These

commissions are set at levels designed to

cover both the expenses of the agent in

accomplishing the assigned task and toprovide a reasonable margin of return to

supplement his normal low official wage forhis effort.

Enforcement agencies have decided that

they cannot rely on the assurances of coveredU.S. firms that the firm's agents or partnershave likewise not violated the law. As U.S.firms have interpreted this, they arerequired to obtain certifications from agents

and partners that they have not made illegalpayments, as defined by U.S. law and courts

and enforced by criminal penalties.According to presentations received by the

Committee, these requirements have causedofficials responsible for procurementdecisions to withdraw from dealing with U.S.

bidders or bypass U.S. firms in invitingforeign participation; they also have caused

foreign officials and businessmen to reduceor avoid routine business relations with U.S.

firms, and foreign firms to withdraw from or

avoid joint ventures with U.S. firms.Indeed, the requirements -'have causednationalistic aversion to efforts by U.S.

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authorities to apply this law to foreignnationals and entities not subject to U.S.law.

Of course the reporting and certificationrequirements also are designed to detercovered (illegal) transaction as well. Butthe consequence is that the enforcementprovisions place obligations on U.S. firms,which, even if they are in full compliancewith U.S. law, require them to acquirecertifications from foreign businessassociates, satisfactory to U.S. officials,and thereby have burdened and even alienatedestablished business relationships.

There is also a problem in conflicting lawenforcement of the Foreign Corrupt PracticesAct. To respond to extensive complaints ofthe business community about vagueness of theFCPA and uncertainty of its reach andapplicability to widely differingcircumstances, the Justice Department hasexpressed willingness to provide advisoryopinions if supplied with specificinformation adequate to permit a judgment.However, it has also warned that suchadvisories will not constitute a legalprotection in any subsequent court challengethat might occur.

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The Securities and Exchange Commissionalso excercises authority in this matter inconnection with legal requirements that thiskind of information be disclosed tostockholders. 1/ The SEC has advised U.S.businesses that it does not consider itselfbound or limited either by advisoryinterpretations of the Justice Department orby the outcome of judicial proceedingsinitiated by the Justice Department.

1/ Sometimes there are far-reachingramifications from disclosure of foreignpayoffs. A case involving RKO General andits parent company, General Tire and RubberCompany, is one in which domestic punishmentof a subsidiary apparently has been meted outfor the foreign sins of a parent company. In1975 and 1976, General Tire disclosed that ithad been engaging in foreign and domestic"payoffs" following Securities and ExchangeCommission charges against the company.Later, when General Tire's subsidiary, RKOGeneral, was challenged on three televisionstation applications filed with the FCC, twoBoston TV companies cited the SEC disclosuresas grounds for disqualifying RKO. AlthoughRKO General argued that it had little to dowith the improper activities of its parent,the FCC majority was not persuaded. TheCommission found a "close relationship"between the two companies, and the verdictagainst RKO was on the presumption that thesins of the parent -- General Tire --reflected also on the character of thebroadcasting child -- RKO General. (The WallStreet Journal, January 25, 1970, page 6.)

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The consequence of this situation,according to presentations received by theCommittee during its Study Mission, is thatU.S. business feels severely constrained.Its in-house and external legal advisorsgenerally counsel great caution because thecriminal and corporate public relationsconsequences of being challenged and found inviolation are severe, and also becausecorporate lawyers located in New York,Chicago, and other major U.S. cities areinclined to "play it safe" in dealing withtransactions involving foreign documents onunfamiliar landscapes thousands of milesaway. The general corporate maxim associatedwith this state of jeopardy and uncertaintyis "when in doubt, don't." This situationhas a chilling effect on U.S. corporateoperations in developing nations. The StudyMission was told of instances in whichcompanies have withdrawn completely fromoperations abroad rather than to risk gettingcaught in advertent violations or challengesto its practices.

The main burden of the Foreign CorruptPractices Act falls inequitably and mostheavily on the small businessman. Reportingand compliance requirements naturally aredesigned to reach the more complex andsophisticated operations, with elaborate andmodern systems of accounting. The smallbusinessman operating with very limitedresources bears a disproportionately heavyburden. Moreover, as a representative of alarge U.S. corporation pointed out, themultinationals with international reputationsto uphold and unique capabilities to offerare more often able to take the high moralroad and refuse any compromise with unethicalbusiness practices without jeopardizing theircompetitive opportunities than are smallbusinessmen. The latter most often offer

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36

fairly standard basic goods or services andcan only survive if they are able to matchthe competition across a broad range ofconditions.

Members of the Study Mission wereparticularly distressed to hear that the Actin some cases rewards corruption on the partof others by taking U.S. firms out ofcompetition where questionable practices maybe involved. By implying that bid awardswill require payments covered by the FCPA,foreign procurement officials can precipitatewithdrawal of ethical U.S. companies capableof winning in straight competition. It isclear that the Act is causing loss of U.S.business opportunities because of reportingand compliance requirements which haveextraterritorial impact on non-U.S.nationals.

Several American businessmen also citedthe current controversy over possibleavailability to the press of shipper exportdocuments under provisions of the Freedom ofInformation Act as an example of how the U.S.may be hobbled with unilateral constraints ontrade. They indicated that many of thesedocuments contain privileged commercialinformation that can give significantadvantage to competitors who do not publicizesuch material. The Study Mission is pleasedto note that this problem is currently underreview in the Senate and hopes that asatisfactory solution will be reached.

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Webb-Pomerene Act

Another serious difficulty for U.S.exporters is the overseas impact of domesticantitrust legislation. Our experience inEast Asia reinforced the widely held beliefthat the Webb-Pomerene Act does not work asintended.

Originally intended to limit theapplication of antitrust laws to foreignmarkets, the Webb-Pomerene Act by court andadministrative interpretation has become soambiguous and confusing that it actuallyinhibits the formation of U.S. consortiacapable of competing for internationalcontracts. The problem is accentuated byfears that collaborative behavior abroadmight be used as evidence of collusive intentin the U.S. market, even though this has nothappened to our knowledge. It tends to havea chilling effect on the willingness ofcorporate counsel to support cooperativebehavior abroad even though it may be withouteffect on the domestic U.S. market.

This effect ironically has particularlyadverse consequences on our participation inmajor projects overseas where traditionallyU.S. firms have been exceptionally wellqualified and competitive. As these projectshave become larger and more expensive, manyexceed the capabilities of a single firm toundertake as prime contractor. While thereare examples of cooperative efforts by U.S.firms in overseas projects, such as amongfirms of the same industry in developingmajor raw material sources abroad, they havebecome the exception rather than the ruleaccording to sources available to theMission.

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In contrast, foreign firms are oftenencouraged to combine by their governmentpolicy. For example, Japan's hugepetrochemical complex in Iran was a jointeffort of 54 or 55 companies in the MitsuiTrading Company group, including financialinstitutions. Most Japanese joint projectsare put together by a trading company withgovernment encouragement. There is nothingin Japanese antitrust law to prevent thesejoint ventures, and in fact they areencouraged by the government.

Financing

An aggressive trade strategy for thefuture must provide for improved exportcredit financing. The Export-Import Bankcurrently supports a much smaller percentageof U.S. exports than comparable institutionsof most of our competitor trading nations asindicated by the following table:

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TABLE V-2

PERCENTAGE OF TOTAL EXPORTSRECEIVING OFFICIAL SUPPORT BY

INSURANCE, GUARANTEES ANDLOANS DURING 1978

Country Percent

U.S. 6France 29Germany 12Japan 35U.K. 35

Source: GAO Report ID-80-16.

There is a compelling case for increasingthe lending capacity of the U.S. through theExim Bank or others which could be developed,thus easing existing constraints.Considering the tremendous disadvantagessuffered by the U.S. export community, ourinstitutions should finance a higherpercentage of exports to at least try tomatch the efforts of competing nations.

Small businesses are particularly stymiedby export financing problems. The Exim Bankfails in two major respects to serve smallbusiness: (1) It either does not handleloans under $5 million, or does not handlethem very well, and (2) it does not haveadequate provision for medium-term financing(less than 7 years) at fixed rates, the areain which small businesses want to borrow. Inaddition, Exim Bank procedures are socomplicated that small business often simplywill not deal with the Bank.

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Aggravating the situation, the SmallBusiness Administration has no real expertisein Exim Bank operations and SBA is not veryhelpful to small businesses in theinternational arena.

A number of things could be done to helpsmall businesses get into world markets. TheExim Bank could establish a special smallbusiness funding program through commercialbanks which would advance funds and obtain aguarantee from Exim Bank/Foreign CreditInsurance Association (FCIA) up to say 80percent of the advance, with the commercialbank risk at 5 percent and the shipper riskat 15 percent. Exim Bank probably hasauthority to do this administratively. Theloan process itself would be under thedirection of the private sector and need notrequire Federal Government involvement.

Exim Bank terms for all business lendingshould be more liberal. At the same time, aselective approach could produce a moreeffective use of funds under an expandedcharter. For example, the U.S. couldundoubtedly get more export mileage out of aseveral million dollar increase for grantfeasibility and project design studies thanfrom an equal increase in general lendingauthority.

Export-Import Bank loanable funds comefrom (1) a repayment of previous credits, (2)surplus accumulated as profits on earliertransactions, and (3) funds borrowed throughthe Federal Funds Market. When market ratesare high, the large proportion of funds from(1) and (2) help cushion Exim Bank's lendingrates from having to increase in step withits current borrowing rates.

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These are considerations which Exim Bank'sofficial competitors do not have becausesimilar lending institutions are eitherfunded directly from national budgets and donot have a cost of funds, or are exemptedfrom having to charge the cost of money sinceany deficits are covered from the Federalbudget.

Exim Bank operates under a congressionalmandate requiring that it reflect its cost offunds in the rates charged for its loans. Inaddition, Exim Bank must find that there is"reasonable assurance of repayment" in allits loans. In the 1978 Exim Bankreauthorization legislation, the Congressrecognized that these strictures preventedExim Bank from matching the competition inimportant instances. Congress authorizedExim Bank to make exceptions to the "cost offunds" limitation to match the competition inspecific cases which its Board of Directorsfinds worthy. The change is an improvement,but Exim Bank can still match the competitiononly as an exception, not as a rule.

Flexibility in lending rates is importantto international lending competition whichdiffers from lending rate competition withinan individual national market. Lending rateswithin a national market differ withinrelatively narrow spreads compared with thewider rate spreads between national markets.Widely differing levels of economic activityand capital availability between nationscause these larger differences, which arereally differences in risk, internationalpayment balances and exchange rate prospects.For this reason alone, Exim Bank should havemore flexibility to vary its rates.

Another area in which Exim Bank ishandicapped is that of mixed and concessional

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credits. Exim Bank cannot do this butseveral competitors can. The JEC StudyMission received examples of concessional aidfinancing by Japan for industrial projects inMalaysia and Korea.

An example from the other side of theglobe is that of a British heavy excavator-equipment firm that competes with MarionPower Shovel Company -- a Division of DresserIndustries, Inc. The British companycompetes directly with Marion in a series oflarge walking draglines for coal andphosphate mining. The British companyreceives assistance from the U.K. ExportCredit Guarantees Department for overseasshipments. To stimulate exports, the U.K.enables the Export Credit GuaranteesDepartment to offer long-term financing at7.75 percent on outstanding balances plus theusual bank and insurance premium fees, whichwould normally push this figure to a total of9 percent.

More importantly, the U.K. is also willingto offer inflation protection wherein theU.K. absorbs excess costs due to inflationbeyond a specific amount, thus protectingboth manufacturer and purchaser from risinginflation rates.

Foreign official agencies which insureexport credits provided by commercial sourcesare another factor which provides greatcompetitive advantage over U.S. exports. Thediscrepancy between U.S. and other officialexport financing resources and export levelsis multiplied when official loan andinsurance guarantee data are combined (seeTable V-3).

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TABLE V-3.

OFFICIAL EXPORT FINANCING RESOURCES

(In billions of U.S. dollars)

Authorized infiscal year 1978 U.S. France Germany Japan U.K.

Loans 3.6 7.8 0.5 3.8 1.4

Insurance 3.7 22.2 14.5 31.0 11.0

Total 7.3 30.0 i5.0 34.8 12.4

Source: A Comparative Study of Export Incentives in France,United Kingdom, United States, Germany and Japan; H. L. Weis-berg and Charles Rauch; International Division, Chamber ofCommerce of the United States, December 1979.

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It should be noted that U.S. insurancerates are considerably above those charged bycompeting official institutions. There arealso other program disadvantages such as therequirement for third guarantees, inadequateinsurance coverage and cumbersome proceduralrequirements.

Appendix B lists the pertinent insuranceprovisions in the United States and fourcompetitor nations.

Having heard a substantial amount oftestimony on these and related complaints,the Mission concluded that one way to dealwith the problem would be to expand annualfunding authority for loans and insurance,together with a more effective administrativeapplication of funds to priority categories,and a greater capacity for matching theprograms used by our competitors.

Because there is some political resistancein some parts of the United States to the"foreign aid" flavor of centralizing overseaslending authority in the tax-supportedExport-Import Bank, some Members of the StudyMission felt that it might be worth exploringa system by which local banks in the UnitedStates could be induced to become more"export-minded." The local bank serving adomestic U.S. manufacturer might induce thefirm to open overseas markets for itsproducts. Moreover, local banks need toupgrade their skills and knowledge to beready to serve local firms should they decideto enter the export markets.

Subsidizing loans for export developmentmight be one way to accomplish this.Deducting such loans from deposit liabilitiesbefore applying reserve requirements might beanother way. Clearly, a more sophisticated

45

system of inducements to get local U.S. banksand the firms they serve to address businessopportunities in overseas markets would servethe local banking institutions and itscustomers and at the same time would servenational policy. That foreign banks are moreaggressive in pursuing overseas business wasevident by the number of foreign bankbranches which dotted all the marketsvisited.

One of the complaints heard during the JECStudy Mission was that even the mostsophisticated American financial institutionsand overseas marketers are inclined to wantquick pay-off investments. Whether it is theimpatience of the American lifestyle or aflaw in the tax code or a peculiarity ofAmerican financial institutions, the lack ofinterest in long-range pay-outs overseas hasseen a lot of marketing opportunities lostfor American businesses.

Competitor nations have long used a"package" approach in their efforts tocapture major projects abroad for theirexporters and service industries. This isparticularly true in process engineering,construction, mining, power, and majorequipment industries. Usually, the bait in apackage is a very early grant or a highlyconcessional loan to finance long-rangefeasibility and project design studies to becarried out by firms from the offeringcountry. These offers are sometimes backedby assurances of officially supported exportcredits, or even long-term concessional aidfinancing. In addition, most competingnational governments preselect one or moredomestic companies to bid on phases of aproject, and then see that those companiesare supported in the bid competition withfinancing and other concessionary supports.

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The only U.S. parallel is the ReimbursableDevelopment Program, currently funded at$3.82 million under Section 661 of theForeign Assistance Act for financing offeasibility and project design studies. Thisis far less than the funding available incompetitor countries. The U.S. Exim Bank hasloan authority for this purpose, but itcannot effectively compete with the grants orsubsidized loans enjoyed by foreign bidders.

United States businessmen make a strongcase for the leverage of such funding inwinning multimillion dollar projects nowbeing lost. To address this competition mayrequire a broad range of adjustments in lawand attitude, including antitrust approaches,tax law modification and inducements tofinancing in ways other than foreign aid orthe Exim Bank. Certainly, government andprivate enterprise in the U.S. -- a nationsettled and developed originally by Europeantrading companies -- can come up withinnovative ways to solve this problem.

In 1977, in response to constituentconcerns, Congress clarified the intentionthat Section 661 be used to improve thecommercial opportunities for U.S. firms.This interpretive clarification has expandedthe potential for this grant program to beused to counter the advantages provided ourcompetition by their governments. However,not only is the $3.8 million Federalappropriation an insignificant fraction ofthat available to restrictions, even it facesFederal budget cuts.

Proponents of expanding this program sayit is not realistic that U.S. firms acceptthe cost of offering grants to foreigngovernments for this purpose. Most foreignindustrial nations permit their firms tax

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credits or even subsidies for undertakingsuch studies. Private grants are oftenunacceptable to developing countrygovernments who need studies funded by othergovernments or international agencies toachieve the aura of objectivity. But if thework of such a study were being done in theU.S., many firms would undertake the domesticwork on an "if come" basis in order to get a"foot-in-the-door" advantage.

Proponents also argue that a small amountof money in this program, in the range of $5to $10 million, would give much greaterexport leverage than equivalent expendituresfor other purposes. Another approach mightbe tax credits. The experience ofcompetitors has been that individual grantsin the $10,000 to $90,000 range often produceproject opportunities worth hundreds ofmillions of dollars in exports.

The importance of feasibility studies forsubsequent contracts and sales can beillustrated by two recent examples. Oneinvolved a French-financed feasibility studyof the Kanlubang Airport just outside ofManila in the Philippines. The feasibilitystudy was conducted by a French firm, Airportde Paris. Airport de Paris later receivedthe contracts for the engineering design andsupervision of construction. Under the U.S.program, the United States financed twoprefeasibility studies by American companiesfor a Thai natural gas pipeline for $220,000.Later another American corporation obtainedcontracts worth $20 million for engineeringdesign and supervision of construction forthe same pipeline.

We believe that the program warrantseither additional funding up to at least $5to $10 million, along with more liberal

48

usage, or some form of tax incentives.Amounts considerably larger than the $5 to$10 million should be considered for futureyears. Also, there should be a moreaggressive implementation of its provisions.

VI. ECONOMIC AND STRUCTURAL PROBLEMS

The foregoing practical problems were themain concern of the witnesses at the EastAsia hearings, but some reference was alsomade to the broader economic and structuralproblems with which U.S. businessmenoperating abroad must cope. These broaderissues are covered in great detail in otherJoint Economic Committee hearings andreports, but some relevant points should bemade in this report.

Productivity

Foremost among these broader issues isAmerican decline in productivity in recentyears. This is a primary cause of ourdomestic and international economic illness.Foreign efficiencies represent productivitydifferentials so great that they obviouslybecome a dominant force in the ability tocompete. The consequences have become alltoo clear in automotive and steel productswhere U.S. productivity has seriouslydeteriorated relative to foreign competitors.

Japanese workers, operating in plants withmore advanced technology, producesubstantially more cars -- and often a higherquality product -- per man year than U.S.workers. Similarly, in the steel industry,the Japanese worker produces considerablymore steel per man year in more modern plantswhich use one-third less energy than theaverage U.S. steel worker. It is significantto note in this connection that of 22 modern

(49)

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steel blast furnaces in the world, 14 are inJapan and none are in the United States. TheU.S. is operating, in large measure, with 30-to 40-year-old plants. Small wonder Japanesesteel productivity far outstrips the UnitedStates.

Semi-conductors, industrial fasteners,ballbearings, electronics, textiles, shoes,and other key consumer products are examplesof other products where we are also severelypressured by overseas competitors because ofour lagging productivity.

The Joint Economic Committee had some hardwords to say on this issue in its 1980 AnnualReport:

An important part of the answer torestoring international competitivenesslies in raising our rate of investmentin plant and equipment. As weemphasize elsewhere in this report,higher rates of investment will boostsagging American productivity and allowus to move toward a lower, more stableprice level. But investment is not theentire answer. During the next decade,we will have to take a hard look atmany of our institutions. The relativeeconomic strength and health of Germanyand Japan suggest that they might havesome lessons for us in terms ofpolicies and institutions. Neithercountry has adopted the adversaryrelationship that often exists betweenthe American Government and the privatesector. That relationship will surelyhave to change if we are to continue tobe the economic as well as thepolitical leader of the free world.Both Germany and Japan give workers agreater voice in the operation of

51

corporations than we do in the UnitedStates. And both Germany and Japanhave some form of a national industrialstrategy that influences, if it doesnot determine, government policy andprivate sector investment plans. It ispremature to suggest that the UnitedStates should move in any of theseparticular directions. What is clearis that our national desire forindustrial and economic leadership willbe severely tested in the decade ahead.Sharply higher energy prices haverendered obsolete or reduced theeconomic life of a substantial portionof U.S. plant and equipment and haveaffected the value of many commercialstructures, private automobiles, andappliances.

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Attitudes

Another impediment to a vigorous U.S.export policy is the large size of the U.S-.domestic market which still represents thelargest and wealthiest market in the world.This has given U.S. industry a strong biastoward domestic marketing.

By contrast, outside of the indigenousfree world markets of Europe, Canada, andJapan, other markets are only a tiny fractionof U.S. market size. Moreover, there isgreat uncertainty and enormous difficultyarising from differences in selling,distribution and documentation; obtainingadequate data; and the barriers of language,customs, and varying income levels. Risks inoverseas selling also include exchange ratefluctuations as well as commercial and evenpolitical risks which do not arise within theU.S. market.

Many foreign markets appear too small tojustify modifying product design, packagingor even advertising, let alone producingproducts especially for those markets.Unlike Europe, where the need to adjust tomarket differences in three or four or moreroughly similar country sizes is a dailyconcern, the very size of the U.S. market andthe distance and differences ,from smallermarkets produces great hesitation, inertia,and resistance by U.S. producers indeveloping foreign markets.

Even today, with the great increase inworld interdependency, only a small minorityof U.S. companies consider exports importantto their profits. Firms that do export oftenuse poor market strategy, like charginghigher prices abroad to cover "risk,"inflexible pricing and inadequate outlays for

53

after-sales servicing, market development,and inventory maintenance. There is apronounced tendency to push exports only whenthe U.S. domestic market is soft. Solutionto this problem will require a reorientationof corporate attitudes and strategies toavoid short-range perspective (as contrastedwith the long-range market developmentstrategies of our competitors).

Protectionism

We must also recognize the consequences ofprotectionism. It is one thing to defendourselves against unfair practices ofcompeting nations; it is quite another matterto attempt to insulate industries from theeffects of their productivity failures.

In most areas, the answer to pleas forprotection must not be to build defensivebarriers. It must be to take the offensiveand give our industry and labor theopportunity, incentive, and means to buildand modernize -- to capitalize on thetremendous resources, technology market, andother advantages of our economy. This StudyMission report, taken in conjunction withearlier and ongoing Joint Economic Committeestudies of U.S. productivity, emphasizes theways in which we can restore or strengthenour economic competitiveness.

Lack of Infrastructure

Another defect in the U.S. export pictureis the weakness of supportive infrastructureto provide financing and the range of relatedservices necessary to success in exportmarketing in the world today.

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One thing that would help would be theestablishment of Federal one-stop serviceshops to include export services of allFederal agencies under the guidance of theDepartment of Commerce, thus saving a lot offrustrating running around.

Equally important, the U.S. commercialattache corps needs to be upgraded.Heretofore, they have been "weak sisters" inthe State Department. Placing them under theCommerce Department may help. Butirrespective of their departmental location,commercial attaches need to be an elitecorps. They need intensive training,upgraded status and prestige, and strongerbacking from Washington -- both in moralsupport and resources. They need to beaggressive marketers of U.S. productsoverseas.

A roadblock to U.S. overseas operationswhich became evident during the Study Missionwas the limited number of bilingual Americansavailable for overseas work. In thiscontext, it might be useful to explore thepossibility of a loan program for businessmenor at least business school students, forlanguage training. This could be called theNational (Defense) Export Education Act,along the lines of the National DefenseEducation Act.

It is symptomatic of the low priorityaccorded international trade in the U.S. thatwe have never developed adequate supportiveservices to match those provided by oursophisticated competitors. United Statesbusiness representatives in Asia stressed theneed for substantial help in developing aneffective network of trade services in theFar East to provide improved export financing

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and risk insurance as well as funds fordeveloping and expanding markets.

One important device recommended in theEast Asia hearings is the trading company.American history, tradition, and law have notprovided a favorable setting for theirdevelopment. European colonizationtechniques and trade practice produced thegiant houses which continue to dominate muchof Asia's trade and which handle a wide rangeand volume of goods and services. Japanquickly matched Europe with conglomeratesbacked by captive private banks, which, inturn, are supported by government financialbacking.

United States trading companies have beenmainly basic commodity traders, singlemanufacturers' marketing outlets, or smallindependent firms with no major assets behindthem, whereas European and Japanese tradingcompanies have had major raw materialholdings, captive banks, or other assets topermit the expansion and development of awide network of complementary services.

In the present setting, small U.S. firmsand many large firms do not export becauseexporting involves unfamiliar risks andrequires specialized knowledge and expensiveskills. For most producers the marginalcosts of developing export opportunities areprohibitive. There is need forintermediaries which, by diversifying traderisks and developing economies of scale inexport operations, could make it possible forsmall businesses, particularly, and largebusinesses, too, to make even greatercontributions to the domestic economy bytapping the expanding foreign markets.

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The Study Mission believes that thesubject warrants immediate attention by theAdministration and the Congress as well asthe U.S. industrial and banking communities.The Joint Economic Committee has alreadycalled upon the Administration to provideCongress with a study assessing existingbarriers to the formation of U.S. tradingcompanies and exploring the feasibility ofincreasing exports through such companies.On the basis of our mission findings, weunderscore the need for this study as soon aspossible. It should include, as one of itsmajor focal points, the question of adequatefinancing for U.S. exports as well asprovision for financial services. It mustinvolve the banks as well as the producers.

VII. SUMMARY

In summary, the Members of the JointEconomic Committee's Study Mission on EastAsian Trade conclude that the United Statesfaces a crisis of trade. Our two-way tradewith East Asia now equals and may soonsurpass that with Western Europe. East Asiais a region offering vast and expandingeconomic opportunity to those nations willingand able to compete successfully forinternational markets.

Yet, the United States is approaching thischallenging and competitive market with lackof coherent strategy or favorable relationsamong business, government, and labor. Ourshare of the East Asian market has declinedfrom 41 percent in the 1960s to 34 percenttoday while the Japanese share has increasedfrom 13 percent to 33 percent during thatsame period. It is obvious that we have beencoasting on past successes and overlooked thefundamental link between domesticproductivity and foreign exports. Worse, wehave shackled our exporters with a number ofdisincentives and restrictions that frustrateefforts at export promotion. Members of theMission find clear need to remove thesedisincentives and to mount an effective tradepromotion strategy.

We must remove inequities in U.S. personaland corporate income tax laws as they affectU.S. business abroad. As presentlyadministered, they discourage the employmentabroad of U.S. nationals and push U.S.industry into hiring foreign nationals. The

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Members of the Study Mission stronglyrecommend that unrealistic tax policies whichdiscourage U.S. exports and benefit foreigncompetitors be amended.

Another serious disincentive to U.S.exports is the Foreign Corrupt Practices Act.As now administered, it benefits competitorswithout reducing the prevalence of foreigncorrupt practices. Members of the StudyMission have introduced a joint resolutionmake possible a more constructiveinternational approach to reducing corruptpractices in international business.

Another disincentive to U.S. exportsarises from uncertainty about application ofthe Webb-Pomerene Act, which was intended tolimit the application of the anitrust laws todomestic transactions. The Study Missiondiscovers that, as presently administered, itcan have a restrictive rather than promotiveeffect on U.S. enterprise abroad.Accordingly, we urge the Congress to removethe ambiguity and make the Webb-Pomereneexemption an incentive to U.S. exports.

United States export financing practicesreveal weaknesses. Assistance fromgovernment programs falls far below thatprovided to our major competitors. We seeneed for strengthening the lending capacityof the Export-Import Bank and for improvedrisk insurance protection.

The Study Mission urges additional fundingof feasibility and project design studiesfrom the present $3.8 million to $5 to $10million, and higher amounts in later years.We believe that this small additionalexpenditure will generate a vastly largervolume of U.S. export sales in East Asia andelsewhere.

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On a more cosmic plane, there is urgentneed to improve productivity in U.S.industry. In many industries we have fallenwell behind our major competitors in thiscrucial department. The 1980 Annual Reportof the Joint Economic Committee has outlineda comprehensive program for improvement. Wewill continue to give it first priority.

And finally, but by no means leastimportant, we must recognize the importanceof exporting to national well-being. Toooften, American businesses have relegatedforeign market opportunities to a very lowpriority in corporate sales policies. Theyhave often failed to establish an adequateservice infrastructure in foreign countriesto support U.S. trade. The Committee urgesAmerican business to give a high priority tooverseas marketing.

The United States will continue to suffertrade problems until we: (1) encouragesavings and investment and strengthen thesupply side of the economy, (2) recognize thevital importance of exports, and (3) replacethe adversary relationships among government,labor, and business with a new spirit ofpartnership.

APPENDIX A

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APPENDIX A. TAX INCENTIVES l/

By making exporting a more profitableventure, the government makes it moreattractive for firms to sell abroad than tosell domestically. There are four broadcategories of tax incentives which might helpto stimulate exports. The first category isthe nontaxation of income derived from exportsales. This category is not mentioned in theaccompanying charts because this practice isforbidden by the GATT and is currentlypracticed in only two countries, Ireland andBrazil.

1/ Export Credit Competition and the Export-Import Bank of the United States, a reportissued to the U.S. Congress by the Export-Import Bank of the United States (March1979).

Cited in A Comparative Study of ExportIncentives in France, United Kinqdom, UnitedStates, Germany and Japan; H. L. Weisberg andCharles Rauch; International Division,Chamber of Commerce of the United States,December 1979.

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The first category which appears in theaccompanying chart is the taxation of foreignbusiness operations. Foreign firms oftenestablish a branch office or sales subsidiaryin a foreign country, preferably one with alow corporate income tax rate, through whichit funnels its export sales. The parentcompany's profits depend on how the homecountry calculates the taxation ofundistributed foreign source profits andforeign tax credits. For example, Francedoes not tax foreign source income. Thismeans that any and all profits earned byforeign entities are not taxed on a currentbasis. The rules within France concerningthe taxation of undistributed profits ofoverseas subsidiaries and foreign tax creditsare complex. On the whole, the taxation offoreign source income by each of thecountries studied is extremely difficult tocompare.

The next broad category concerns those taxincentives which are specifically designed tostimulate exports. These incentives usuallyinvolve special tax deductions, deferrals,and exemptions available for exports but notfor domestic sales.

Administrative practices by the taxauthorities can also help exports, forexample, by leniency in calculating theintercompany prices of an exporting firm.France has made it publicly known that inauditing exporters intercompany pricing rulesare not to be enforced. It would bedifficult for the United States to adopt thisor a similar practice without charges ofunfair treatment by firms which only selldomestically.

The last item concerns border taxadjustments, of which the most familiar is

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the value-added tax (VAT). This tax is usedby all members of the European Community.Basically, VAT is a tax imposed on theadditional value of output created at eachstage of production. Unlike a retail salestax, however, which is collected only onfinal sales to consumers, VAT is collected instages, so that each seller pays tax only onthe value added at that stage. This meansthat VAT is collected on sales to alldomestic customers, not just individualretail customers.

The calculation of all direct and indirecttaxes, including any tax credit, accelerateddepreciation, and deferrals, results in theeffective rate of taxation on export income.With the possible exception of West Germany,The United States has the highest effectiverate of taxation on export income. 2/

2/ It should be noted that a completepicture of any country's internationalcompetitiveness must take into account notonly export-related taxes but all direct andindirect taxes.

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It should also be pointed out that theUnited States has, in addition to a generallack of tax incentives, certain taxdisincentives. For example, Sections 911 and913 of the Internal Revenue Code make theUnited States the only major country in theworld to impose income taxes on itsnonresident citizens. This discourages U.S.citizens from working abroad and raises costsfor U.S. firms operating abroad. As aconsequence, smaller firms are deterred fromentry into foreign markets because theycannot afford the expense of sending U.S.citizens to live overseas. Larger firms areforced to cut back on their overseas staffs,which, in turn, cuts back on the number ofagents available to promote U.S. exports.

UNITED STATES FRANCE GERMANY JAPAN JNITED KINGDOM

TAXATION OFFOREIGN BUSINESSOPERATIONS

Foreign Branch Foreign branch pro- Foreign branch pro- Foreign branch pro- oreign branch pro- oreign branch pro-Operations fits are taxed at fits are not taxed, fits are taxed the its are taxed at its are taxed at

the applicable and there are no normal rate (51%) he usual rate he usual ratecorporate rate deductions for plus the foreign tax 52%), and losses (52%), and losses(presently 46%), losses or credits credit, or in cer- re fully deduc- re fully deductibleand losses are for foreign taxes, tain cases, impo- ible. against other in-fully deductible. unless company sition of a flat one of the British

elects to be tax- 25% tax rate. ompany. Lossesed on worldwide Losses are fully ire deductibleincome. deductible, even against foreign

though foreign surce businessincome is exempt snly when carriedunder a tax ver to followingtreaty. ears.

Dividends aretaxed at theapplicable corpo-rate rate (pre-sently 46%) whenthey are receivedby the parent.

Subpart F of theU.S.Internal Re-venue Code callsfor taxation ofcertain types ofincome of con-trolled foreigncorporations,even though divi-dends may not havebeen received bythe parent.

Subsidiary profitsare not currentlytaxable, andlosses are notcurrently deduc-tible. If theparent owns 10%or more of theforeign subsid-iary, 95% of divi-dends received areexcluded from tax-ation.

There is no equi-valent to the pro-visions of SubpartF of the U.S. In-ternal Revenue Code.

Subsidiary profitscurrently taxable,and losses arecurrently deduc-tible. Dividendsare taxed at theusual corporaterate of 51% whenthey are receivedby the parent.

The exact require-ments are lessstringent thanthose in SubpartF of the InternalRevenue Code ofthe U.S.

Subsidiary profitsare not currentlytaxable and lossesare not currentlydeductible. Divi-dends are taxed atthe usual corporaterate of 52% whenthey are receivedby the parent.

There is no equi-valent to the pro-visions of SubpartF of the U.S. In-ternal Revenue Code.

Subsidiary profitsare not currentlytaxable, and lossesare not currentlydeductible. Divi-dends are taxed atthe usual corporaterate of 51% whenthey are receivedby the parent.

There is no equi-valent to the pro-visions of SubpartF of the U.S. In-ternal Revenue Code.

Foreign Subsid-iary Operations

Foreign Tax CreditsWhen a branch orsubsidiary locatedabroad pays taxesto the foreigngovernment, a taxcredit will allowthe parent to sub-tract this amountfrom the tax itowes to the honegovernment. Thereare, however,limitations tothese credits.

UNITED STATES FRANCE GERMANY JAPAN JNITED KINGDOM

All persons subjectto U.S. income taxare eligible toreceive a foreigntax credit forcertain foreigntaxes paid ontheir foreignsource income.

The limitation onthe allowable for-eign tax creditmust be computedon an overallbasis. Foreigntax credits maynot be used tooffset U.S. taxon U.S. sourceincome.

Special rulesprovide addi-tional limita-tions on foreignoil and gas in-come.

Even though Frenchfirms are not tax-ed for their oper-ations abroad, atax credit forforeign taxes paidcan be available.Upon authorizationfrom the Ministryof Finance, aa French companycan elect to com-pute its Frenchtaxable income ona world-wide basisby adding togetherthe profits andlosses of theirFrench and foreignbranch activities;or on consoli-dating all foreignsubsidiary andbranch activitiesinto one tax re-return. In either

case, foreignlosses can be usedto offset othertaxable income anda credit is allowedagainst the Frenchtax, but it may notexceed 50% of theforeign income in-cluded in the return.

To receive foreigntax credits, theclaimant must be aGerman residenttaxpayer and theforeign source ofincome must alsobe subject toGerman taxation.

A limitation onthe allowable for-eign tax creditmust be computedon a per countrybasis.

To receive foreigntax credits, theclaimant must be aJapanese residenttaxpayer and theforeign source in-come must also besubject to Japanesetaxation.

A limitation onthe allowable for-eign tax creditmust be computedon an overall basis.For purposes ofcomputing the over-all limitation, anyloss incurred bya foreign branchneed not reduceother foreignsource income.This provisionis referred to asthe "modified"overall limitation.

To receive foreigntax credits, theclaimant must be aU.K. resident tax-payer and the for-eign income mustbe subject to U.K.tax.

The limitation onthe allowable for-eign tax creditsclaimed must be cm-puted on eachseparate "source"of foreign income,and the credit islimited to thegreater of theforeign tax or theU.K. tax payable tothat particularsource of income.

UNITED STATES FRANCE GERMANY JAPAN UNITED KINGDOM

SPECIAL EXPORT TAX'INCENTIVES

'Export-Related None French firms can German firms csn Corporations de- In Britain, whereDeductions and deduct from their deduct special re- riving income from indirect expensesDeductible taxable income serves for losses overseas trans- are not deductible,Reserves special reserves incurred by a actions are en- a corporation can

for losses of newly established titled to deduct deduct businessforeign branch foreign-based from 1-1.7% of the entertainment ex-operations, even- company. The for- value of the goods penses that arethough foreign sign subsidiary sold, which is to be directly relatedentities are not must be at least credited to a re- to export activi-taxed. 50% owned and must serve for overseas ties if the custo-

have income from market development. mer entertainedExporting companies industrial or resides overseas.which extend med- commercial activi- Corporations hold-ium-term credit ties. ing 10% or more ofare entitled to a "Special Over-create a special seas Enterprisedeductible re- Judicial Person"serve to cover (a non-investingthe risk inherent foreign subsidiary)in the extension may deduct amountsof credit abroad. credited to a re-

serve for lossesfrom such operations.

Corporations canestablish a deduc-tible reserve forforeign exchangelosses on its netlong-term receivables.

Tax Deferrals and

ExemptionsDomestic Inter-national Sales Corp.(DISC): A U.S. cor-poration devoted ex-clusively to ex-porting will not betaxed on income

"Joint Export Pro-gram": When small ormedium-size firmscoordinate to makea joint effort toimprove their bus-